In a boardroom at XM Radio Canada's Toronto office, CEO Michael Moskowitz describes the satellite radio business by drawing a sketch right out of Economics 101.
One line represents fixed costs; another shows subscriber fees; a shaded area sits near the spot where the two lines cross: "This area right here is profit," he says. "All gravy."
But 31/2 years after its launch in Canada, satellite radio is seeing more water than gravy. And the industry is facing new pressures that raise questions about its future.
Auto manufacturers - the industry's top source of revenue - are suffering. While the proportion of cars sold with built-in satellite radios is increasing, Bank of Nova Scotia is forecasting Canadian new-car sales for 2009 will be their lowest in 13 years. That's a problem, because car buyers are satellite radio's biggest, and most dependable, market.
For $15 a month, satellite radio subscribers buy exclusive content - 130-plus channels of music, sports, and comedy, mostly jingle-free - which can be broadcast to their car, mobile phone or computer.
XM Canada, owned by Canadian Satellite Radio Holdings Inc., and competitor Sirius Canada Inc. have both paid millions of dollars to auto makers to install the specialized radios in their new cars and provide the service free to buyers on a trial basis.
XM Canada's Mr. Moskowitz says auto subscribers make up about 70 per cent of its business, and will continue to be the company's target market. XM lost subscribers for the first time last quarter (falling to 508,700 from 514,500) because of a drop in mobile phone use.
A recent XM promotion with GM included two free years of satellite radio for all car buyers. XM is also counting on new promotions with its Rogers and Telus phone partners.
Sirius Canada, meanwhile, has exclusive contracts with Chrysler and Ford. The privately held company last released subscriber numbers in June, 2008, when it said it had reached the 750,000 mark. But it didn't specify how many of these were paying for their own contracts. "We're clearly the industry leader, no matter how you measure it," said Mark Redmond, Sirius Canada's chief executive officer.
The two broadcasters offer similar types of programming, though each has exclusive elements (XM Canada has NHL hockey; Sirius offers Howard Stern), and each touts its 13 channels of CRTC-mandated Canadian content.
Both companies count as their most faithful customers the same demographic: adult men, both commuters and rural residents, who love music. XM Canada says its audience is 70 per cent male, and that 10 per cent of subscribers are under the age of 35. Sirius says half of all households in some Alberta, B.C. and NWT communities subscribe to its service.
Despite the secured audiences, profitability has proved elusive since the companies began broadcasting in December, 2005. XM Canada has lost $314-million so far. Though its bottom line improved with every quarter but the last, it hasn't yet made a profit in net terms. Mr. Moskowitz believes he needs 450,000 to 500,000 "self-paying" customers - at least 100,000 more than now - to hit that target. Sirius declined to discuss financial details, saying only "Our shareholders are very pleased with our results to date."
Although Canadian consumers seem willing to keep paying for satellite radio, there may not be enough of them to keep two businesses viable. Carl Howe, technology analyst at the Boston-based Yankee Group, suspects the market may be hitting the saturation point in terms of customer demographics. "The question is, does satellite radio ever break out of its niche?"
Satellite radio is also facing challenges from rapidly changing technology. Internet radio sets, broadcasting using broadband and WiFi networks, are now available in retail stores and require no monthly subscription, and could one day be installed in cars. Many free radio streams are also available on the Internet.
Both XM and Sirius Canada are looking at iPhone applications, launched last month to great demand in the United States (for a higher fee).
Complicating the Canadian companies' strategies is the fact that they are each partly owned by the same U.S. parent. Sirius XM Radio Inc. provides most of the Canadian networks' content, as well as the satellites that broadcast and transmit the signals to Canadians' cars and homes. The U.S. company owns about 23 per cent of XM Canada and 49.9 per cent of Sirius Canada.
The original U.S. parents, XM and Sirius, merged last year to form Sirius XM Radio. The move spurred a loss of 400,000 subscribers there in the last quarter, down to 18.6 million, as fans upset by post-merger programming cuts tuned out.
Sirius XM Radio is also struggling with debt of about $500-million (U.S.). If it cuts programming further, or if the Canadian market doesn't expand, the case for two separate Canadian companies could be even less compelling.
Neither Mr. Redmond nor Mr. Moskovitz would speculate about joining forces, a move that would require shareholder and CRTC approval.
John Bitove is XM Canada's founder and its largest shareholder. He said he would encourage merger talks "only if it makes business sense and is the right thing to do for our shareholders."
Gary Slaight, former owner of Standard Broadcasting Co., holds a minority stake in Sirius. He's satisfied with the business - "It's going great, way better than expected" - but would be open to looking at a merger.
"We'd be foolish not to."